Treasury Provides Safe Harbor for Good Faith Certification on Paycheck Protection Program (“PPP”) Loans Under $2 Million
Patrick Neuman | 05.13.20
Today, May 13, 2020, the U.S. Treasury Department released a new FAQ that addresses how the Small Business Administration (“SBA”) will review the good faith certification that requires borrowers to certify that the current economic uncertainty makes the loan request necessary to support the borrower’s ongoing operations.
In FAQ 46, SBA explained that it will deem a borrower to have made the certification regarding the necessity of the loan in good faith if the borrower, together with its affiliates, received PPP loans with an original principal amount of less than $2 million. Thus, in SBA’s review of PPP loans, borrowers with loans under $2 million will be provided with safe harbor with respect to the necessity certification.
FAQ 46 further provided that SBA will review for compliance with program requirements all loans greater than $2 million. If SBA determines during this review that a borrower did not have an adequate basis for making the certification concerning the necessity of the loan, SBA will notify the borrower that the outstanding PPP loan balance must be repaid and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, then SBA will not pursue administrative enforcement or refer the matter to other agencies. FAQ 46 also provides that SBA’s determination concerning the certification will not affect SBA’s loan guarantee.
FAQ 46 is provided in full below. The full U.S. Treasury FAQ can be accessed by clicking here. For more information or updates, please contact your Boardman Clark attorney or the authors.
46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.